What Bitcoin is and isn’t

After the last post on Bitcoin, I’ve been having some interesting discussion with a reader, Jonathon Duerig, about Bitcoin and money. This is the first of a two parter on money and digital technology

Bitcoin resembles the traditional gold standard, in that it’s a form of money imagined as outside government interference that can’t be inflated. It’s finite. The traditional attraction of this is obvious—for people who already have money, and especially investment capital, a scarce, finite money supply means the value of the money you hold increases. You can charge more to lend it A loose money supply tends to do the opposite. Loose money, paper money, tends to benefit the debtor and classically stimulates economic growth. Bitcoin confers most of the alleged advantages of the gold standard.[1. one interesting difference is that we know exactly how finite the Bitcoin supply is going to be. We know the supply of gold is limited, but we don’t really know how limited. There may be huge amounts of gold under the sea floor, or bubbling in molten rock: we don’t know. One of the advantages of gold, you could argue, is that it’s finite in supply but we have no idea how finite. But the maximum number of Bitcoins is set at 21 million. There will never be more than that, and in fact, because some are lost, there will never be even that many.]

The traditional justification for gold was that it had “intrinsic value.” It was made valuable by nature, by God, by the fact that it seemed to be universally desired: gold stands in the claims of gold bugs as “outside” of the social world. It will still have value if the much-longed-for government collapse finally occurs. The “intrinsic value” of gold is the central claim of gold bugs. It’s what they answered when people (like Ben Franklin) said “how come you just arbitrily declared only gold could be money?” Gold has “value,” was the answer, in the same way it has weight and color and mass.

Intrinsic value has always seemed to me to be a ludicrous idea, because “value” isn’t like weight; it’s not a physical property, it’s a cultural idea, a set of agreed-upon propositions. Saying gold has intrinsic value is like saying gold has intrinsic freedom or intrinsic cheerfulness or intrinsic creativity. Freedom, novelty and creativity are social things, not material properties. Absent people, gold has mass and atomic weight but no value at all.

Unlike gold, Bitcoin was never imagined as having “intrinsic value.” Quite the opposite: Bitcoin is a heavily heavily ideological thing, invented out of thin air by persons unknown. It’s as real as any complex number arrived at by massive calculation. It has utility–it’s useful–and it’s kept scarce. But it’s only useful to people with a digital infrastructure. And its value derives from the beliefs of those who use it, and they tend to be libertarians or people skeptical of government. In that sense, Bitcoin is just like paper money. It requires a “faith community.”

We now use a pure paper money, “Federal Reserve Notes,” backed by the authority of the United States of American and our faith in its stability and prosperity. This is not a trivial thing–people regularly fight and die for the United States of America, after all, and swear they love it and insist that it has been specially blessed by God. The United States of America is a big powerful nation with lots of material assets and a vast military. It looms large in the imagination; there’s a lot there to believe in. It’s true that the law compels us to take Federal Reserve Notes–you can’t legally refuse to accept them in payment. But this ultimately depends on faith as well. If people lost faith in the nation, they would simply start negotiating private contracts which required payment in other forms of money–like Bitcoin.

Bitcoin resembles the traditional gold standard, in that it’s a limited supply that can’t be inflated. But it very much resembles paper money in that it depends on a community of belief. In Bitcoin’s case it’s faith in technology; in the benign motives of someone who may or may not be Satoshi Nakamoto, and faith in libertarian anti government dogma. Some people believe in it as an instrument of freeing us all from state tyranny; others believe in it as a ting they can speculate in. But it only works if people believe in it, like paper money.[1. This is true of all money, in fact; gold only has value because people agree to believe it has value]

History demonstrates very clearly, I’d argue, that you can’t have a money that’s based on a fixed supply, and you can’t have a money that’s limited to only one faith community. A limited supply fosters monopoly and stifles growth; it makes it impossible to fight wars or undertake large scale infrastructure and investment. You want a certain amount of flexibility in your money. For example, the US engaged in massive deficit spending to fight WWII. It would not have been able to do so under the gold standard. Does anyone think that would have been a good thing? And it’s too hard to do business outside of your faith community–Bitcoins remain difficult to buy, and limited in what you can spend them on. They mostly circulate among co-religionists. But a money based on something in unlimited supply is no good either. So we have tried basing money on metal, and basing the money supply on the alleged wisdom of elites, like, in the 1820s, Nicholas Biddle of the Second Bank of the US, or Ben Bernanke of the Fed in the early 21st century, or the community of libertarian techies.

Bitcoin is yet another attempt to manage the fact that we want money to do multiple, contradictory things. We want it to be scarce and abundant at the same time. We want to have a lot of money ourselves, but if everyone has a lot of money then its value goes down, because it’s not scarce anymore. It might be more accurate to say that what we want is a situation where I (you) have a lot of money and most people have only a little. But that’s not an attractive society, for most of us. Balancing the relative scarcity and abundance of money is the heart of the whole problem that Bitcoin addresses–addresses very badly, in my opinion. I have an alternative coming in the next blog post.

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[…] if ordinary people made their own money? Much of the buzz around cryptocurrencies such as Bitcoin (explained here by historian Michael O’Malley) and local exchange systems (for example, Brixton Pound) hinges on […]